Summary of Hersh Shefrin's Beyond Greed and Fear

By IRB Media

Please note: This is a companion version & not the original book.

Book Preview: #1 The field of behavioral finance is the application of psychology to financial behavior. It examines the behavior of practitioners and how they make the same mistakes repeatedly.

#2 The first three behavioral themes are heuristic-driven bias, frame dependence, and inefficient markets. Heuristic-driven bias means that practitioners rely on rules of thumb when processing data. Frame dependence means that practitioners’ perceptions of risk and return are highly influenced by how decision problems are framed.

#3 The field of finance, which is the study of investments and their effects, is heavily influenced by behavioral phenomena. The areas of portfolio theory, asset pricing, corporate finance, and the pricing of options are all areas of finance that are heavily influenced by behavioral phenomena.

#4 The pick-a-number game is a simple example used to demonstrate the errors that people make when making decisions. If you are playing to win, you need to understand how the other players are thinking. If everyone thinks along these lines, the winning entry will not be 1, but 13. 6.

• Language: English
• Publisher: IRB Media
• Release date: Feb 16, 2022
• ISBN: 9781669347767

IRB Media

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Book preview

Insights on Hersh Shefrin's Beyond Greed and Fear

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 1

#1

The field of behavioral finance is the application of psychology to financial behavior. It examines the behavior of practitioners and how they make the same mistakes repeatedly.

#2

The first three behavioral themes are heuristic-driven bias, frame dependence, and inefficient markets. Heuristic-driven bias means that practitioners rely on rules of thumb when processing data. Frame dependence means that practitioners’ perceptions of risk and return are highly influenced by how decision problems are framed.

#3

The field of finance, which is the study of investments and their effects, is heavily influenced by behavioral phenomena. The areas of portfolio theory, asset pricing, corporate finance, and the pricing of options are all areas of finance that are heavily influenced by behavioral phenomena.

#4

The pick-a-number game is a simple example used to demonstrate the errors that people make when making decisions. If you are playing to win, you need to understand how the other players are thinking. If everyone thinks along these lines, the winning entry will not be 1, but 13. 6.

#5

LTCM, a hedge fund, watched its $7 billion shrink to $4 billion in September 1998. In response, the Federal Reserve Bank of New York organized a privately funded rescue plan in which fourteen major banks and brokerage houses contributed $3. 6 billion in exchange for 90 percent of LTCM’s equity.

#6

The Journal of Finance published two of the papers presented at the 1985 meeting, which defined two different avenues for analyzing the implications of behavioral phenomena. One stream focused on security prices, and the other on the behavior of investors.

#7

In the 1980s, scholars began to discover a host of empirical results that were not consistent with the view that market returns were determined in accordance with the capital asset pricing model and efficient market theory. These findings were labeled anomalies.

#8

The traditional finance community has reacted to the findings of behavioral finance by attempting to distance themselves from the findings, even going so far as to argue that the findings are too interesting to be taken seriously.

#9

Some people still believe that markets are efficient, and that behavioral finance is irrelevant if markets are. However, the weight of the evidence suggests that markets are not efficient.

#10

The power of behavioral finance is such that a few key concepts underlie many different stories. These stories span a lot of territory and illustrate how heuristic-driven bias and frame dependence affect financial decisions.

#11

I have organized the book around themes and applications. The first three chapters focus on heuristic-driven bias, frame dependence, and inefficient prices, respectively. The remainder of the book deals with applications that involve all three themes.

#12

The first theme is heuristic-driven bias, which is the tendency to make decisions based on a limited set of available information. This can lead to systematic errors in our decisions, which we refer to as biases.

#13

Heuristics are rules of thumb that people develop through trial and error. These rules are often incorrect, and behavioral psychologists have identified the principles underlying them and the systematic errors they produce.

#14

Heuristics are like back-of-the-envelope calculations that sometimes provide the right answer.